Floating and Fixed Exchange Rates

Why are floating rates considered to be superior to fixed rates in dealing with major shocks such as oil price increases? Explain why floating exchange rates did not produce a reduction in the US balance of payments deficit during the early 1980s? Describe the system that was developed to replace floating exchange rates.

First we need to explain what fixed and floating exchange rates are. Fixed exchange rate regime is a regime in which central banks buy and sell their own currencies to keep their exchange rates fixed at a certain level (Mishkin G-4). Floating exchange rate regime is an exchange rate regime in which the value of currencies are allowed to fluctuate against one another (Mishkin G-5). Floating exchange rates are like a shock absorber. When export demand declines, depreciation makes domestic goods more competitive abroad, stimulates an offsetting expansion in demand, and dampens the contraction in domestic economic activity (FRBSF).

For a short-term floating rates would be good during a shock such as oil price increases, but not for long-term. During this short-term, floating rates influence economic activity. With a fixed exchange rate, economic activity adjusts to the exchange rate, where with a floating rate the exchange rate is a reflection of economic activity. Both fixed and float exchange rates have strengths and weaknesses.

Floating exchange rates did not produce reduction in the US balance of payment deficit during the early 1980s because influential economic arguments supported fixed exchange rate regimes as an anchor to break hyper- and high inflation in many emerging markets (Treasury).

Because foreign exchange crises lead to large changes in central banks’ holdings of international reserved and thus significantly affect the official reserve asset items in the balance of payment.

The system that was developed to replace floating exchange rates was Dirty Float. Dirty Float is a system where countries attempt to...

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...examine independently floatingexchangerate arrangements and other conventional fixed peg arrangements in separate sections. Each section contains four parts:
• An examination of the mechanics of the regime;
• A discussion of its advantages and disadvantages;
• An analysis of the experiences of selected nations and how these experiences highlight the strengths and weakness of the system; and
• My final thoughts on that particular exchangerate regime.
1. Conventional fixed peg arrangements
a. Mechanics of conventional fixed peg arrangements
Fixed peg arrangements are recognized by the IMF as a fairly inflexible exchangerate regime. Countries in this category peg their currency, either formally or on a se facto basis, to another currency or a basket of currencies at a fixedrate. Such a basket would contain the currencies of major trading or financial partners which are weighted to reflect distribution of sales, services and cash flows.
The exchangerate is allowed to fluctuate within limits one percent above and below the fixed central rate. It is the role of the nation’s monetary authority to maintain the fixed parity using either direct or indirect intervention. Direct intervention involves buying and selling the...

...Introduction
There have been discussions about the optimal exchangerate regime for a very long time,
reflecting the evolution of the world economy and the conduct of monetary policy. The gold
standard, as well as systems tied to other commodities, provided a monetary anchor, as well as a
standard for financing international transactions, for many different countries over the centuries.
Histories of gold standards recount many periods of financial turmoil and very sharp variations
in output and prices. The Bretton Woods system was established, with the U.S. dollar as the centerpiece, as a system of fixed, but variable, exchangerates. When this system came under stress in the 1960s, older debates of the relative merits of fixed versus flexible exchangerates developed new life and the original Bretton Woods system was replaced by a system of floatingexchangerates among the major currencies.
The Gold Standard
The origin of the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value. To facilitate trade, a system was developed so that payment could be made in paper currency that could then be converted to gold at a fixedrate of exchange. The gold standard is an important historic example...

...opt for a flexible exchangerate system. Nations, however, which do not have such policy makers should opt instead for a fixedexchangerate system. When attempting to stabilize an economy, monetary policy is the most efficient weapon that policymakers possess (Weerapana, 2003). In other words, it is much simpler to enact monetary policy than fiscal (Weerapana, 2003). Some nations benefit from a fixedexchangerate system, however. Nations such as Brazil, Kenya and Turkey have been irresponsible in printing money; this leads to inflation (Weerapana, 2003). This leads to a steep rise in prices, and a subsequent devaluing of the currency. A fixedexchangerate will, for these nations, neutralize the central bank (Weerapana, 2003). Fiscal policy is not as much of a consideration in determining an exchangerate system. It is simply too unwieldy an instrument.
Flexible exchangerates can contribute to greater uncertainty for traders, since fluctuations can lead to differences in remunerative value, between when the deal was made, and when payment is made (Tornell and Velasco, 1995). In a fixed system, importers and exporters don’t have to worry about such fluctuations. But when monies spent are excessive, nations may be forced to devalue currency...

...Subject:
Fixed versus floatingexchangerates
Introduction
The exchangerate regime
The exchangerate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. Each country has its exchangerate policy which determines the form of a government influence on the currency exchangerate.
There are three main type of the exchangerate regime:
• a floatingexchangerate, where the market dictates the movements of the exchangerate,
• and the fixedexchangerate, which ties the currency to another currency,
• a pegged float, where the central bank keeps the rate from deviating too far from a target band or value, divides into 2 subtypes:
o Crawling bands: the rate is allowed to fluctuate in a band around a central value, which is adjusted periodically,
o Crawling pegs: the rate itself is fixed, and adjusted periodically.
I’m going to concentrate on the first two of exchangerate regimes.
The fixedexchangerate
A fixed...

...﻿FloatingExchangeRateExchangerates between currencies have been highly unstable since the collapse of the Bretton Woods system of fixedexchangerates, which lasted from 1946 to 1973. Under the "floating" exchangerates, since 1973, exchangerates are determined by people buying and selling currencies in the foreign-exchange markets . The instability of floatingrates has surprised and disappointed many economists and businessmen, who had not expected them to create so much uncertainty.
During the fifties and sixties, however, as stresses built on the system of fixedexchangerates, both economists and policymakers began to see exchangerate flexibility in a more favorable light. In a seminal paper in 1953, Milton Friedman argued that the fear of floatingexchangerates was unwarranted. By the late sixties Friedman's view had become widely accepted within the economics profession and among many businessmen and bankers. Therefore, concern over the instability of floatingexchangerates was replaced by an appreciation of the greater flexibility that floatingrates...

...Gold Standard Versus FloatingExchange:
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By: Jane Doe
Eco 500
In this paper, I am going to discuss and compare exchangerates. The two types of exchangerates are the Gold Standard and the Floatingexchangerate. First, I will describe exchangerates. Second, I will compare the two types in this dissertation. Third, and finally I will give my conjectures and beliefs on which I consider the better system.
An exchangerate is, “The price of a unit of one country’s currency expressed in terms of the currency of some other country.”(Multinational Business Finance) An example of this is taking the United States dollar alongside the British pound. I will not be using an actual rate, just a rate for comparison purposes. If someone wanted to exchange dollars into 10 pounds and the rate is 2 pounds to the dollar, we simply take 10x2=20. It would take $20.00 United States dollars to obtain $10.00 in British pounds. This means that the pound is valued more than the dollar since it takes more dollars to equal one pound or one unit of British currency.
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...Whitney Rozowski
ExchangeRates
Essay 3
Principles of Economics: Macro
1060/52
If you have ever traveled to a country that does not use U.S currency, then you had to exchange your U.S. dollars into the country’s currency that you have just traveled to. You may notice that your U.S dollars have gotten you more or less of the other currency. This means you have just been affected by the exchangerate. If you have 1,000 U.S dollars it does not mean you will have an equal amount in another country’s currency. Exchangerates effects our economy greatly, because we have no choice but to imports goods from other countries, therefore however much of a good our dollar gets us in another country effects us here at home. This is because we could get more or less of a product depending on how much our dollar is worth in comparison to the country’s currency that we are trading with.
The definition of an exchangerate is the price of one country’s currency expressed in another country’s currency. If you traveled to Europe right now you would get .77 euros’ for every dollar you have. This is an example of currency depreciation on our side(but currency appreciation on their side). Currency depreciation is when a nation’s currency can buy fewer units of a...

...﻿Exchangerates are the value of one currency with respect to another, for the purpose of conversion. They affect investment levels, via the cash rate and values of domestic assets; trades, via prices and the terms of trade (TOT); liabilities, via currency appreciation or depreciation and the valuation effect, and trades. Exchangerates are influenced by government policies in the short term and market forces in the long term. Since the Australian dollar (AUD) was floated in 1983 it has experienced an appreciating trend; however, in recent years the AUD has depreciated from its mining-boom highs due to expansionary monetary policy and weaker economic outlooks.
Prior to the 1980s, Australia’s exchangerate system was under a fixed system, whereby the government determines the value of the currency in terms of a fixed value of another currency or a basket of currencies. In 1983, the exchangerate system began to operate under a floated system in which there is no government intervention and the value of the AUD is determined by market forces. For instance, an increase in supply of AUD depreciates the currency and an increase in demand appreciates the currency. Under a floated system, the exchangerate also correlates with the cash rate; an increase in the cash rate...